Pitfalls of Payday Lending
Many consumers today are stretched to the economic limit. Wages have been stagnant in many sectors of the economy while the price of gasoline and other basic necessities continues to go up. Two-paycheck families feel the crunch, while single parents may feel overwhelmed. Meanwhile, almost like an answer to a prayer, an industry has grown all around us that promises just that little bit of help that would tide us over. This industry is the cash advance, payday advance, or payday loan industry.
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Marketed over the Internet, in kiosks at the neighborhood grocery or convenience store, or on billboards all over town, these lenders promise instant cash, no credit checks, and no problems getting an advance. The product is meant as a simple, unsecured loan, due at the borrower’s next payday that eliminates the sometimes-lengthy process of getting a loan from more traditional sources. When used as intended, as a simple, quick source of emergency cash between paydays that is paid back in full on the next payday, this product is a useful tool – as many people who have used the option will agree.
However, if the situation that caused the shortfall is one that is long-term, or if the consumer borrows more money than can be comfortably paid back in the given amount of time, taking out one of these loans can be the beginning of a debt cycle that is difficult to break out of. If the money is simply not there at the time the loan is due, and another, less expensive alternative has not been found in that two-week period, the option offered is to pay the lender only the flat fee, refinance (or roll over) the loan, and add another fee. At face value that seems simple. However, the flat fee consists of an extremely high rate of interest over an extended time, as much as over 1,000 percent. The $15 fee for the $100 loan can become much more that the original loan in a short period of time. Depending on the borrower’s income, it may be nearly impossible to pay it off.
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Other than avoiding this product altogether, there are things to watch for that can still make this product a useful tool. Some companies will roll the loan over automatically unless you tell them to take the full amount out of your account at the time the loan is due. Others will increase the amount of your loan at any time, allowing you to pay a fee to borrow the fee to pay for the first loan.
Look for other alternatives before you roll the loan over, either before you get the loan or in that two-week period before the loan is due the first time. Be sure you have the money in your account, and inform the lender to take the full amount out. Find out what their deadline is for letting them know the loan will not be rolled over.
Some companies do not allow rollovers or limit how many they will accept. Others have limits to the number of this type of loan that you can have at one time. Nevertheless, almost all of them can become a perpetual ride from which you can’t get off. They can also become almost addicting, especially if you do not explore alternative, cheaper sources of financial help.
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* Cash-Advance-USA.org provides information and research on cash advances/payday loans. We are not a payday lender or broker, nor are we necessarily affiliated with the companies profiled on this site. Not all products and services are available in each state.
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